Download Monetary Aggregates: A User's Guide

MONETARY AGGREGATES: A USER’S GUIDE
John R. Waiter
The monetary aggregates are measures of the
nation’s money stock. The most narrowly defined
monetary aggregate, M1, is the sum of the dollar
amounts of currency and nonbank travelers checks
in circulation, plus checkable deposits. M2 includes
M1 plus overnight repurchase agreements, overnight
Eurodollar deposits, general purpose and broker/
dealer money market fund balances, money market
deposit accounts, and savings and small time
deposits. M3 is the sum of M2 and large time
deposits,
term repurchase
agreements,
term
Eurodollar deposits, and balances in money market
funds employed solely by institutional investors.
Analysts study the relationships
among these
monetary
measures and other macroeconomic
variables, such as national income, employment,
interest rates, and the price level. These relationships are then used to forecast changes in economic
activity, interest rates, and inflation. The Board of
Governors of the Federal Reserve System defines
the aggregates and calculates and reports their values.
This article explains the origin and evolution of the
monetary aggregates and discusses how they are
prepared and released, how they are used, and when
and why they are revised. Information on the
monetary base is also included.
How the Monetary
Aggregates
Evolved
Over the years economists have proposed many
different groupings of financial assets into something
called “money.” No single definition of money has
been universally acceptable. Two approaches have
been used to define money. The first is to identify
what financial assets are commonly used for certain
purposes. Analysts using this approach generally include as money financial assets serving (1) as a
medium of exchange, i.e., assets widely acceptable
in payment for goods, services, and debts, and (2)
as a store of value. A second approach to defining
money is to find the groupings of financial assets the
movements of which are most closely correlated with
the movements of certain macroeconomic variables
such as national income, employment, and prices.
Both approaches have contributed to the development of the monetary aggregates constructed by the
Federal Reserve. A brief chronology of the evolution of these measures is given below.
20
ECONOMIC
REVIEW,
In 1944 the Board of Governors of the Federal
Reserve System began reporting monthly data on two
types of exchange media, (1) currency outside of
banks, and (2) demand deposits at banks, i.e.,
non-interest-bearing
deposits transferable by check
or convertible into cash “on demand.” It also reported
the sum of these two. The Board’s expressed intent
in reporting the data was “to increase the information available to the public on current changes . . .
in the nation’s money supply.” In time the sum of
currency outside banks and demand deposits came
to be called M1, the narrowest of the Fed’s monetary
aggregates.
Until 1971 M1 was the only monetary aggregate
for which estimates were published by the Board of
Governors. In that year, however, the Board began
reporting data for two additional aggregates, M1? and
M3. Interest in these latter variables reflected the
growing importance of the monetary aggregates in
formulating monetary policy. It also reflected the view
among some economists that the appropriate definition of money should include assets capable of providing a temporary store of value. Accordingly, M2
was defined to include M1 plus savings deposits at
commercial banks and time deposits at commercial
banks except large negotiable certificates of deposit,
Similarly M3 was defined as the sum of M2 and
deposits at mutual savings banks and savings and loan
associations.
In 1975, the Board began publishing data for even
broader collections of financial assets, namely M4,
and MS. M4 included M2 plus large negotiable
certificates of deposit. MS was the sum of M3 and
large negotiable certificates of deposit.
The decade of the 1970s witnessed the development of many financial instruments. Some of the new
assets were close substitutes for demand deposits,,
namely negotiable order of withdrawal (NOW) accounts which are interest-bearing checkable accounts,,
savings accounts featuring automatic transfer to
checking accounts (ATS accounts), credit union share
draft accounts, and money market mutual funds with
checking privileges. These new accounts began to
be used as exchange media but were not counted
in M1 until 1980.
The introduction of these new assets also coincided
with what some economists interpreted as changes
JANUARY/FEBRUARY
1989
in the relationships between the monetary aggregates
and economic variables such as income, employment,
and prices. These apparent changes provided some
of the Fed’s motivation for modifying its definitions
of the aggregates in 1980.1 At that time the Fed
replaced its M1 definition of money with M1A and
M1B. M1A was equivalent to the old M1, including
only currency and demand deposits; M1B included
all of M1A plus NOW and ATS balances at banks
and thrifts, credit union share draft balances, and
demand deposits at mutual savings banks.2 At the
same time old M2 through M5 were replaced with
new measures of M2 and M3. New M2 included all
of M1B and a number of other assets that are easily
convertible to transaction account deposits or that
can be used in transactions to a limited degree. These
were overnight repurchase agreements (RPs) issued
by commercial banks and certain overnight Eurodollars held by nonbank U.S. residents, money
market mutual fund shares, and savings and smalldenomination time deposits at all depository institutions.3 New M3 added to M2 large-denomination
time deposits at all depository institutions and term
RPs at commercial banks and savings and loan
associations.
In January 1982 the Board of Governors stopped
reporting M1A and redesignated M1B as M1. Since
then the definitions have been modified only
slightly. Table I shows the current magnitudes of M1,
M2, and M3.
Monetary
Base
The monetary base is composed of currency held
by the public and in vaults of depository institutions,
plus reserves of depository institutions. In 1968 the
Federal Reserve Bank of St. Louis began publishing
figures on the monetary base. In 1979 the Board of
Governors of the Federal Reserve System also began
publishing data on a somewhat different version of
the monetary base.
The base can be viewed as the foundation upon
which the superstructure of deposits is erected. An
increase in the reserves component of the base allows
the system of depository institutions to expand
deposits. Initially, an increase in reserves-resulting
from open market operations or loans by the Fed1 See Board of Governors
(January 1979), p. 24.
(June 1976) and Board of Governors
2 M1A excluded demand deposits held by foreign commercial
banks and foreign official institutions while old M1 did not.
3 For a thorough discussion of RPs see Stephen A. Lumpkin’s
article “Repurchase and Reverse Repurchase Agreements” in
Cook and Rowe (1986), pp. 65-80.
FEDERAL
RESERVE
leads to an increase in “excess” reserves, that is,
reserves beyond the amount needed to meet reserve
requirements at depository institutions. These institutions use the excess reserves to make loans and
investments which soon become deposits. When
these deposits are spent and redeposited, they create
additional excess reserves and lead to the extension
of more loans. Through a multiplicative process the
money supply is increased by a multiple of the Fed’s
original addition to the monetary base. The extent
to which the money stock increases upon an increase
in the monetary base depends on the percentages
of required and excess reserves held by depository
institutions and on the public’s holdings of cash
relative to deposits.4
As noted above, the Board of Governors’ and the
St. Louis Federal Reserve Bank’s estimates of the
monetary base differ, and do so in three respects.
First, the Board and St. Louis adjust the base
differently to cleanse it of changes that are simply
the result of changes in reserve requirements.5
Second, the Board and St. Louis account for vault
cash differently. Third, they seasonally adjust their
estimates differently.6
Preparation and Release of
Monetary Data
The Board of Governors constructs its estimates
of the monetary aggregates from information supplied
by depository institutions, the U.S. Treasury, money
market mutual funds, New York State investment
companies, nonbank issuers of travelers checks, and
foreign central banks. Some of these institutions
report every week, others report less frequently.
Some report in an abbreviated form not available to
larger institutions. To produce weekly and monthly
estimates of the aggregates, the Board estimates
missing data where detail or frequency of reporting
4 Humphrey (1987) describes the theory of deposit expansion
and its history. Most introductory level college money and banking texts provide a basic discussion of how monetary actions of
the Fed affect the base and the money stock. Burger (1971) goes
into great detail.
5 For example, when the reserve requirement against business
time deposits with maturities of 2-½ to 3-½ years was
dropped in April 1983, the amount of reserves banks were
required to hold declined by $80 million. In order to prevent
a corresponding increase in excess reserves the Fed concurrently
withdrew this $80 million through open market operations,
leading to an identical decline in the monetary base. The Board
of Governors and the Federal Reserve Bank of St. Louis then
eliminated this $80 million decline in their adjusted monetary
base data.
6 Burger (1979) discusses the causes of the differences between
the Board of Governors’ and St. Louis’ monetary base estimates.
BANK
OF RICHMOND
21
Table
I
COMPONENTS OF THE MONETARY AGGREGATES
AND MONETARY BASE AND THEIR LEVELS
August 1988
Billions
of dollars
782.5
M1
207.2
Currency
Travelers
checks
Demand
deposits
Other
7.2
290.0
checkable
deposits
278.1
3032.0
M2
M1
782.5
Overnight
RPs
Overnight
Eurodollars
MMF
balances
(general
64.9
15.8
purpose
and broker/dealer)
MMDAs
231.2
517.1
Savings
433.8
Small
deposits
time
deposits
985.2
3847.3
M3
M2
Large time
3032.0
514.7
deposits
Term
RPs
121.0
Term
Eurodollars
102.4
MMF
balances
(institution
only)
84.0
271.2
Monetary Base
Currency
207.2
Reserves
61.1
Sources: Data for M1, M2, M3 and their components
are from Board of
Governors of the Federal Reserve System H.6 release, “Money
Stock,
Liquid Assets, and Debt Measures,”
dated October 6, 1988. Data for
Monetary
Base are from Board of Governors of the Federal Reserve
System H.3 release, “Aggregate
Reserves of Depository Institutions
and
the Monetary Base,” dated October 6, 1988. The Currency figure shown
H.3. MonetaryBase is from H.6 while the Reserves figure IS from
are lacking. Table II lists, by component, sources
of data used by the Board to calculate the monetary
aggregates.
The Board of Governors reports figures for M1,
M2, and M3 each week (usually on Thursday afternoon at 4:30 eastern time). Reported values are
weekly averages of daily figures for the week ending
ten days earlier. The Board publishes both seasonally
adjusted and not seasonally adjusted data. Revisions
of the seasonally adjusted aggregates can be large due
to changing seasonal patterns over time.7
7 For a discussion of the difficulties of seasonal adjustment
Hein and Ott (1983).
22
ECONOMIC
see
REVIEW.
Explanation: M2 and M3 both differ from the sums of their components
because these aggregates are seasonally adjusted by adjusting the
non-M1 components of M2 and the non-M2 components of M3 as
blocks. Several of these components are not reported in seasonally
adjusted form while those that are have been adjusted individually.
Monetary Base differs from its components because the currency
component the Board uses in its Monetary Base computation includes
some adjustments excluded from the H.6 currency figure. The Board
does not publish the currency portion of Monetary Base separately.
Other checkable deposits are negotiable order of withdrawal (NOW)
accounts, automatic transfer service (ATS) accounts, credit union
share draft accounts, and demand deposits at thrift institutions.
RPs,
repurchase agreements, are loan arrangements in which the
borrower sells the lender securities with an agreement to repurchase
them at a future date.
Eurodollars are dollar-denominated deposits issued to U.S. residents by
foreign branches of U.S. banks worldwide.
MMF, money market mutual funds, are funds investing in money market
instruments, offered by investment companies.
MMDA, money market deposit accounts, are savings deposits on which
only a limited number of checks can be drawn each month.
Savings deposits are liabilities of depository institutions that do not
specify a date of withdrawal or a time period after which deposited funds
may be withdrawn, although depository institutions must reserve the
right to require at least seven days written notice before withdrawal of
savings deposits.
Time deposits are liabilities of depository institutions payable on a
specified date, or after a specified period of time or notice period,
which in all cases may not be less than seven days following the date
of deposit.
Term, as in Term RPs and Term Eurodollars,
greater than one day.
means maturities
of
The Reserves component of Monetary Base is total reserves of depository institutions with Federal Reserve Banks plus vault cash used to
satisfy reserve requirements and is adjusted for reserve requirement
changes.
For a detailed description of each of the components of M1, M2, and M3
see any recent H.6 release or footnotes to the table entitled “Money Stock,
Liquid Assets, and Debt Measures, ” in the statistical section of a recent
Federal Reserve Bulletin. For a detailed description of the Reserves component of Monetary Base see the footnotes to the H.3 release, or footnotes
to the table entitled “Reserves and Borrowings, Depository Institutions”
in
the statistical section of a recent Federal Reserve Bulletin. The Federal
Reserve Bank of Richmond’s Instruments of the Money Market includes a
chapter for each of the major money market instruments,
including
Eurodollars, RPs, and MMF, listed above.
The Federal Reserve, in its H.6 release and in the tables of its Federal
Reserve Bulletin, publishes estimates of liquid assets and total debt of nonfinancial sectors with the monetary aggregates even though these are not considered monetary aggregates. The liquid assets measure is called L and is
made up of M3 plus U.S. savings bonds, short-term Treasury securities, commercial paper, and bankers acceptances. The aggregate labeled “Debt”
includes the debt of the U.S. government, state and local governments, and
private nonfinancial sectors. L first appeared in the Federal Reserve Bulletin
in 1980, with Debt following in 1984. Items in L and Debt fall outside of
the category of assets that most economists would call money.
The Board of Governors releases its most recent
estimates of the monetary base every two weeks.
These figures are two-week averages of daily figures
for the two weeks ending eight days earlier. The
Board publishes a seasonally adjusted monetary base
figure adjusted for changes in reserve requirements,
a not seasonally adjusted base figure adjusted for
changes in reserve requirements, and a not seasonally
adjusted figure not adjusted for reserve requirement
changes. The St. Louis Federal Reserve Bank also
releases a new estimate of the average monetary base
every two weeks. It provides only a base figure
adjusted for reserve requirement changes and for
seasonal change.
JANUARY/FEBRUARY
1989
Table
II
SOURCES OF DATA USED BY THE BOARD OF GOVERNORS IN THE
ESTIMATION OF THE MONETARY AGGREGATES AND THE MONETARY BASE
Component
Description of Component
Source of Data on Component and Frequency
M1
Currency
Currency
public.
Nonbank
travelers
checks
and coin in the hands of the nonbank
Consolidated
Statement
of Condition
of All
Federal Reserve Banks (H.4.1)-weekly;
vault
cash data from Report of Transaction Accounts,
Other Deposits and Vault Cash (FR 2900)weekly,
and Quarterly
Report of Selected
Deposits,
Vault
Cash,
and
Reservable
Liabilities
(FR 2910Q).
Travelers checks issued by institutions
other
than banks. Included in M1 because they can
be used directly for purchases.
Report
of Travelers
(FR 2054)-monthly.
Checkable
deposits
including
regular
noninterest-bearing
checking
accounts,
NOW
balances, ATS balances, and credit union share
draft balances.
FR 2900; FR 2910Q; Reports of Condition and
Income
(Call Reports&quarterly;
internal
Federal Reserve float data; Weekly Report
of Assets and Liabilities
for Large Banks
(FR 2416).
Overnight and continuing
contract repurchase
agreements (RPs) issued by commercial banks.
Included in M2 because they are generally considered short-term
investments
used in managing demand deposit balances.
Report of Selected Borrowings
(FR 2415)weekly;
Annual
Report
of Repurchase
Agreements
(FR 2090A);
Weekly Report of
Assets of Money Market Mutual
Funds (FR
2051A); Weekly Report of Assets for Selected
Money Market Mutual Funds (FR 2051C).
Overnight Eurodollars issued to U.S. residents
by foreign branches of U.S. banks worldwide.
Short-term
investments
like RPs.
Report
of Selected
Deposits
Branches Held by U.S. Residents
weekly; FR 2051A;
FR2051C.
Money market mutual fund
(MMF) balances (general
purpose and broker/dealer)
Often checkable,
but included
in M2 rather
than M1 because turnover rates are more like
savings
instruments
than
transactions
instruments.
Investment
FR 2051A
Company
Institute
(ICI) gathers
and FR 2051C for Fed covering all
Money market
Limited check writing features and turnover
rates like savings rather than transactions
accounts cause Fed to include this asset in M2
rather than M1.
FR 2900;
FR 2910Q;
Demand deposits and
Other checkable
deposits
Checks
Outstanding
M2
M1
Overnight
repurchase
Overnight
Eurodollars
Savings
deposit
agreements
accounts
deposits
Passbook
and
telephone
transfer
accounts.
FR 2900;
FR 2910Q;
in Foreign
(FR 2050)-
Call Reports.
Call Reports;
FR 2416.
time
deposits
Time deposits at depository institutions
with
denominations
less than $100,000.
Includes
RPs with denominations
less than $100,000.
FR 2900;
FR 2910Q;
Call Reports; Monthly
Survey of Selected
Deposits and Other Accounts
(FR 2042);
Report of Repurchase
Agreements on, U.S. Government
and Federal
Agency
2090Q)--quarterly;
Securities (FR
Large time
deposits
Time deposits at depository
denominations
of $100,000
largely by institutions.
FR 2900;
FR 2416;
Small
M3
M2
institutions
or more.
with
Held
FR 2910Q;
FR 2051A;
Call Reports;
FR 2051C.
Term
RPs
Denominations
$100,000
or greater with more
than one day maturity. Held largely by institutions rather than individuals.
FR 2415;
FR 2090A;
Call Reports;
FR 2051A;
FR 2051C.
Term
Eurodollars
More than
institutions
Weekly Report of Foreign Branch Liabilities to,
and Custody Holdings for, U.S. Residents (FR
2077); information
from Bank of Canada and
Bank of England; FR 2051A;
FR 2051C.
MMF
balances
(institution
only)
one day maturity,
held largely
rather than individuals.
Balances
held
individuals.
by
institutions
rather
by
than
FR 2051A;
FR 2051C.
Monetary Base
Currency
Currency and coin in the hands of the nonbank
public plus currency and coin in bank vaults
not used to satisfy reserve requirements.
H.4.1;
Reserves
Reserves of depository
institutions
held with
Federal Reserve Banks plus vault cash used to
satisfy reserve requirements.
FR 2900;
FEDERAL RESERVE BANK OF RICHMOND
FR 2900;
FR 2910Q;
Call Reports.
H.4.1.
23
The
Board of Governors
publishes historical series of the
monetary aggregates and many of
the components making up the
aggregates.
These
series are
periodically updated to reflect
revisions or redefinitions of the
aggregates. Both the Board and
the St. Louis Fed produce
historical series for the base.
Table III lists the monetary aggregates and their component
series as well as the monetary
base and its component series
available from the Board and St.
Louis.
Table Ill
AVAILABILITY OF TIME-SERIES ON
MONETARY AGGREGATES AND COMPONENTS
MAKING UP MONETARY AGGREGATES
Series
8 The President of the Federal Reserve
Bank of New York is a permanent voting
member of the Federal Open Market
Committee
while the other eleven
Federal Reserve Bank presidents share
four voting memberships on a rotating
basis. All seven members of the Board
of Governors are also permanent voting
members.
24
Monthly
Averages
Available Beginning:
sa
nsa
Aggregates
M1
1/75
1/75
1/59
1/47*
M2
1/81
1/81
1/59
1/59
M3
1/81
1/81
1/59
1/59
1/59**
1/59**
1/59
1/59
Monetary
Base-Board
Adjusted
Monetary
Base-St.
Louis
1/72**
Adjusted
deposits
Other checkable
deposits
Overnight
RPs
Overnight
Eurodollars
MMMF
1/29
1/19
(general
1/59
1/47*
1/75
1/59
1/47*
1/75
1/63
1/75
1/75
1/75
1/75
1/63
1/75
11/69
12/79
2/77
2/80
11/73
purpose
and broker/dealer)
MMMF
1/50
of MS
Currency
Demand
1/72**
1/72**
Unadjusted
Components
1/59
1/59**
Unadjusted
How The Monetary
Aggregates Data Are Used
The Fed’s legislative mandate
is to set a monetary policy consistent with high employment,
stable prices, and moderate longterm interest rates. In semiannual
testimony to Congress, the Chairman of the Board of Governors
of the Federal Reserve System
reports the targets set by the
Federal Open Market Committee
(the Fed’s monetary
policymaking body)8 for growth of the
monetary aggregates. The Chairman also relates these targeted
growth rates to forecasted rates of
unemployment,
output growth,
and inflation. Because of concern
with the instability of the behavior
of M1, the Federal Open Market
Committee has not specified an
M1 target range since 1986,
although it has continued to set
target ranges for M2 and M3.
The Federal Reserve cannot
directly control the quantity of
money. It can, however, control
Weekly
Averages
Available Beginning:
nsa
se
(institution
only)
travelers
checks
4/74
2/80
1/75
1/75
1/59
Savings deposits
1/81
1/81
1/59
1/59
Small time deposits
1/81
1/81
1/59
1/59
Large time
1/81
1/81
1/59
1/59
Nonbank
deposits
MMDA
Term
RPs
Term
Eurodollars
Components
1/59
12/82
12/82
1/75
10/69
12/79
1/59
of Base
Reserves-Board
1/59**
Adjusted
Unadjusted
Reserves-St.
1/59**
1/59
1/59
1/59
1/59**
Louis
1/50
Adjusted
Currency-St.
1/47
1/50
1/72**
Louis
Money Stock Data,”
Sources: Board of Governors of the Federal Reserve System, H.6, “Historical
March 1988; Board of Governors of the Federal Reserve System, H.3, “Reserves of Depository
and Monetary Statistics, 1941-1970,
Institutions,
Historical Data,” June 1988; Banking
Board of Governors of the Federal Reserve System, 1976; The Federal Reserve Bank of
St. Louis.
* Data from 1/47 until 12/70 can be found in Banking and Monetary Statistics, 1941-1970.
Board
of Governors of the Federal Reserve System, 1976, while data for 1/59 to current are available from
Board of Governors of the Federal Reserve System, H.6, “Historical Money Stock Data,” March 1988.
Definitions used in these two sources differ.
**
Weekly
data are available
sa = Seasonally
until 2/84,
after which only biweekly
adjusted
nsa = Not seasonally
adjusted
ECONOMIC REVIEW, JANUARY/FEBRUARY 1989
data are available.
variables that influence short-term interest rates,
namely the quantity of reserves held by depository
institutions and the monetary base, and thereby influence the growth rate of the aggregates. Greater
provision of reserves through Federal Reserve open
market purchases of securities tends to push down
the federal funds rate and other short-term interest
rates. Lower interest rates, in turn, help determine
the quantities of the monetary aggregates demanded by the private sector. Downward pressure
on federal funds and other rates makes holding
money balances, which pay no or low rates of interest, less costly. The lower cost of holding money
increases the quantity of money demanded. Assuming money supply equals money demand, the result
is an increase in the level of monetary aggregates.
Changes in the aggregates normally are followed by
temporary changes in aggregate output and employment and by permanent changes in prices.9 Chart 1
illustrates the relationship between M2 and the price
level. As is conventional in such comparisons, M2
is shown per unit of real output, i.e., is divided by
real GNP, to adjust for growth in the economy.10
The monetary aggregates have been watched
closely by those attempting to predict Fed policy
moves.11 In periods when the Fed sought tight
control of the growth rate of the aggregates, unusually
fast or slow money growth has generated expectations of subsequent policy actions by the Fed to
arrest or reverse these movements. In such periods,
the financial markets react to the announcement of
the weekly M1 figure. The announcement of a higher
than expected M1 figure, for example, leads market
participants to increase their estimate of the probability that the Fed will put upward pressure on the
funds rate, and other short-term rates rise in reaction to these changed expectations.12
Many economists study the aggregates to improve
their understanding of the links between monetary
growth and changes in other macroeconomic variables. Prior to the 1980s empirical studies generally
found stable relationships between M1 growth and
inflation and GNP growth. These findings were important to the Fed’s decision to place more emphasis
on the monetary aggregates in monetary policymaking during the 70s and early 80s. With the financial deregulation and disinflation of the early 1980s
9 See Board of Governors (July 1988), pp.
Broaddus (1988), pp. 45-49.
10 Friedman
(1969), p.177.
11 Loeys (1984).
12 Walter (1988), pp. 222-25.
419-20,
M2/REAL-GNP AND
GNP FIXED WEIGHT PRICE INDEX
however, studies began to find that the once stable
relationships between M1 growth and inflation and
GNP growth were breaking down. These findings
led the Federal Reserve in 1982 to de-emphasize M1
in its monetary policymaking process.13 Recent
studies, however, suggest that changes due to disinflation and deregulation have had a smaller effect on
M2 than on M1 growth, and that the relationship
between M2 growth and inflation has remained
fairly stable.14 In his February 1989 testimony before
Congress the Chairman of the Board of Governors
stated that “over the long haul there is a close relationship between money [M2] and prices.” The Fed,
consistent with the view that further reductions in
the growth rate of M2 are necessary to achieve longrun price stability, reduced its target range for M2
in both 1988 and 1989.15
Revisions to the Monetary
Aggregates
Major revisions to the published data on the
monetary aggregates occur for four reasons. First, the
data are revised as reporting or processing errors are
discovered.
Second, the aggregates are revised
annually to incorporate “benchmark” changes. Third,
the seasonally adjusted data are revised annually
to incorporate new seasonal adjustment factors.
Finally, the historical series are revised whenever
there is a redefinition of the aggregates.
and
13 Friedman
(1988) and Bernanke and Blinder (1988).
14 Hetzel and Mehra (1988), Mehra (1988), and Reichenstein
and Elliott (1987).
15 Greenspan
1989).
FEDERAL RESERVE RANK OF RICHMOND
(April 1989) and Board of Governors
(March
25
With thousands of institutions reporting to the
Federal Reserve System on a weekly basis, it is impossible for the Fed to find and correct all errors
before the first release of monetary aggregate data.
As errors are discovered the Board revises the data.
Most revisions occur within the first month following initial release of a figure, although some can take
place months later.
As noted above, to produce estimates of the
monetary aggregates the Board of Governors must
estimate the deposits held in financial institutions not
reporting on a weekly basis. Most of these institutions do report data on a quarterly or annual basis,
however. When these quarterly or annual figures
become available, they provide points of reference,
or “benchmarks,” which the Board uses to make more
accurate estimates for intervening dates. The Board
makes these benchmark revisions to the aggregates
each February.
The monetary aggregates are seasonally adjusted
to remove those movements that tend to recur at
the same time each year, such as the temporary increases in transactions balances before Christmas and
before the due date for tax payments. To determine
the proper seasonal adjustment factors to apply to
a given month’s or week’s aggregates the Board
normally uses data on the aggregates for three years
before and three years after the month or week in
question. No later data are available for the most
recently released aggregates so the Board forecasts
fifteen months of the data and appends it to the
actual aggregate data. As time passes, the estimates
of the seasonal factors can be made more accurately
as forecasted data are replaced by actual data and as
data errors are corrected and new benchmarks
become available. Each February, the Board reestimates the seasonal factors for the data series
used in the monetary aggregates and revises the
seasonally adjusted data accordingly. 16
As discussed earlier, the Federal Reserve changes
the definitions of its aggregates from time-to-time
following financial market innovations and regulatory
changes that affect the way money is held. Some
definitional changes are minor and produce only small
revisions in the aggregates: others, such as those
occurring during the early 1980s, lead to major
revisions. When the Fed changes the definitions of
the monetary aggregates, it revises the historical data
to be consistent over the whole period of the series.
(For a list of the beginning dates of various series
see Table III.) Previously published data, however,
16
Lawler (1977), Hein and Ott (1983), pp. 16-20, and Cook
(1984), pp. 22-25.
26
may not bear the same definitions. Thus when comparing data at different dates, users should take care
to determine that the data definitions are consistent.
Sources of Data
Monetary aggregate data are available from many
sources. On each Friday The Wall Street Journal
publishes a table giving the money stock data released
on Thursday afternoon. Historical data can be found
in the Federal Reserve Bulletin, in the Board of
Governor’s H.6 release, in the Board’s annual
historical supplement to the H.6, “Historical Money
Stock Data,” in the Federal Reserve’s Banking and
Monetary Statistics, 1924-1941, Banking and Monetary
Statistics, 1941-1970, and Annual Statistical Digest for
years since 1970.
Historical data on the monetary base are available
directly from the St. Louis Federal Reserve Bank
and from the Board of Governors, or in the Board’s
H.3 release as well as the Board’s historical supplement to the H.3, “Reserves of Depository Institutions, Historical Data.” Normally, on Friday, The
Wall Street Journal publishes a table including the most
recent figures on the monetary base from the H.3
release.
Suggestions for Further Reading
Most college level money and banking texts discuss
the monetary aggregates and the monetary base and
their relationship to economic variables. James N.
Duprey’s “How the Fed Defines and Measures
Money” in the Spring-Summer 1982 issue of the
Quarterly Review of the Federal Reserve Bank of Minneapolis, examines the aggregates and discusses their
construction. “Data Sources Used In Constructing
the U.S. Monetary Aggregates,” a 1984 monograph
by Cynthia Glassman of the Board of Governors of
the Federal Reserve System, details the sources
used in the estimation of the monetary aggregates.
The debate among economists over the best definition of money is discussed in Alfred Broaddus’s
“Aggregating the Monetary Aggregates: Concepts and
Issues” in the Economic Review of the Federal Reserve
Bank of Richmond, November/December 1975.
The footnotes found in the Board of Governor’s
weekly H.6 release provide detailed definitions of
the aggregates. The H.6 release also describes components included in each of the aggregates and
reports their estimated levels over time.
The February 1980 Federal Reserve Bulletin article
“The Redefined Monetary Aggregates” by Thomas
Simpson, describes the events and intellectual forces
that led the Fed to redefine its aggregates in 1980
ECONOMIC REVIEW, JANUARY/FEBRUARY 1989
and specifies how the redefinition was accomplished. This article includes time series charts showing the growth of the pre-1980 aggregates and the
post-1980 aggregates.
A Monetary History of the United States, 18671960, by Milton Friedman and Anna Schwartz provides a seminal discussion of how changes in growth
of the money stock have affected the American
economy. The authors discuss and make use of the
Fed’s monetary aggregates throughout much of the
book. Monetary Statistics of the United States, also by
Friedman and Schwartz, provides estimates of the
quantity of money for the period 1867-1968 and
discusses sources and methods of construction of
historical money stock estimates. This volume also
devotes more than 100 pages to alternative approaches to the definition of money.
The Federal Reserve Bulletin and the Board of
Governors’ Annual Report generally document and
explain definitional changes in the monetary aggre-
gates. Banking and Monetary Statistics, 1941-1970,
published by the Board of Governors, includes a
detailed discussion of the Fed’s money stock
measures.
“The Monetary Base-Explanation
and Analytical
Use,” by Leonall C. Anderson and Jerry L. Jordan,
in the August 1968 Federal Reserve Bank of St.
Louis Review, explains the construction of the St.
Louis version of the monetary base and points out
why that concept is- of importance to monetary
economists. The Board of Governors’ H.3 release
gives a complete definition of the Board’s monetary
base in its footnotes. Carl M. Gamb’s “Federal
Reserve Intermediate
Targets:
Money or the
Monetary Base?” in the January 1980 Federal Reserve
Bank of Kansas City Economic Review, discusses the
pros and cons of use of the monetary base in
monetary control and provides a good review of the
Board’s and St. Louis’ construction of the base.
References
Anderson, Leonall C., and Jerry L. Jordan. “The Monetary
Base-Explanation
and Analytical Use.” Federal Reserve
Bank of St. Louis Review 50 (August 1968): 7-11.
Bernanke, Ben S., and Alan S. Blinder. “Credit, Money, and
Aggregate Demand.” American Economic Review, 78 (May
1988): 435-39.
Board of Governors of the Federal Reserve System. “A Proposal
for Redefining the Monetary Aggregates.” Federal Reserve
Bulletin 6.5 (January 1979): 13-42.
Banking and Monetary Statistics,
1976.
1914-1941.
Washington,
Banking and Monetary Statistics,
1976.
1941-1970.
Washington,
“Implementing Monetary Policy.” Federal Reserve
Bulletin 74 (July 1988): 419-29.
. “Improving the Monetary Aggregates.” Report of
the Advisory Committee on Monetary Statistics. June 1976.
. “Monetary Aggregates and Money Market
Conditions in Open Market Policy.” Federal Reserve Bulletin
57 (February 1971): 79-95.
“Monetary Policy Report to the Congress.”
Federal Reserve Bulletin 74 (August 1988): 517-33.
. “Monetary Policy Report to the Congress.”
Federal Reserve Bulletin 75 (March 1989), forthcoming.
. “Money Stock Revisions.” (Annual historical
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Reserve System release H.6, “Money Stock, Liquid
Assets, and Debt Measures”). March 1988.
“New Monetary and Banking Statistics.” Federal
Reserve Bulletin 30 (February 1944):134.
. “Notes to Table 1.21.” Federal Reserve Bulletin
72 (November 1986): A14.
. “Reserves of Depository Institutions.” (Annual
historical supplement to the Board of Governors of the
Federal Reserve System release H.3, “Aggregate Reserves
of Depository Institutions and the Monetary Base”). June
1988.
Governors,
69th Annual Report, 1982. Washington:
1983.
Board of
The Federal Reserve System: Purposes & Functions.
7th ed. Washington: Board of Governors, 1984.
Broaddus, Alfred. “Aggregating the Monetary Aggregates:
Concepts and Issues.” Federal Reserve Bank of Richmond
Economic Review 61 (November/December
1975): 3-12.
. A Primer on the Fed. Richmond:
Bank of Richmond, 1988.
Federal Reserve
Broaddus, Alfred, and Marvin Goodfriend. “Base Drift and
the Longer Run Growth of M1: Experience from a Decade
of Monetary Targeting.” Federal Reserve Bank of Richmond
Economic Review 70 (November/December
1984): 3-14.
Burger, Albert E. “Alternative Measures of the Monetary
Base.” Federal Reserve Bank of St. Louis Review 61
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. The Money Supply Process. Belmont,
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California:
Cook, Timothy Q. “The 1983 M1 Seasonal Factor Revisions:
An Illustration of Problems That May Arise in Using
Seasonally Adjusted Data for Policy Purposes.” Federal
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1984): 22-33.
FEDERAL RESERVE BANK OF RICHMOND
27
Cook, Timothy Q., and Timothy D. Rowe, eds. Instruments
of the Money Market, 6th ed. Richmond: Federal Reserve
Bank of Richmond, 1986.
Duprey, James N. “How the Fed Defines and Measures
Money.” Federal Reserve Bank of Minneapolis Quarterly
Review (Spring-Summer
1982), pp. 10-19.
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Various dates.
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“Monetary
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. “U.S. Financial Data.” Various dates.
Friedman, Benjamin M. “Monetary Policy Without Quantity
Variables.” American Economic Review 78 (May 1988):
440-45.
Humphrey, Thomas M. ‘“The Theory of Multiple Expansion
of Deposits: What It Is and Whence It Came.” Federal
Reserve Bank of Richmond Economic Review73 (March/April
1987): 3-11.
Lawler, Thomas A. “Seasonal Adjustment. of the Money
Stock: Problems and Policy Implications.” Federal Reserve
Bank of Richmond Economic Review 63 (November/
December 1977): 19-27.
Lindsey, David E., and Henry C. Wallich. “Monetary Policy.”
In The New Palgrave, A Dictionary of Economics, edited by
John Eatwell, Murray Milgate, and Peter Newman, vol. 3.
London: The MacMillan Press Limited, 1987, pp. 508-15.
Friedman, Milton. The Optimum Quantity of Money and Other
Essays. Chicago: Aldine Publishing Company,
1969.
Loeys, Jan G. “Market Views of Monetary Policy and Reactions
to M1 Announcements.”
Federal Reserve Bank of Philadelphia Business Review (March/April 1984), pp. 9-17.
Friedman, Milton, and Anna Jacobson Schwartz. A Monetary
History of the United States, 1867-1960. Princeton, N.J.:
Princeton University Press, 1963.
Mehra, Yash P. “The Forecast Performance of Alternative
Models of Inflation.” Federal Reserve Bank of Richmond
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. Monetary Statistics of the United States, Estimates,
Sources, Methods. New York: National Bureau of Economic
Research, 1970.
McCarthy, F. Ward, Jr. “Basics of Fed Watching.” In The
Handbook of Treasury Securities, edited by Frank J. Fabozzi.
Chicago: Probus, 1987.
Gambs, Carl M. “Federal Reserve Intermediate Targets: Money
or the Monetary Base?” Federal Reserve Bank of Kansas
City Economic Review 65 (January 1980): 3-15.
Reichenstein,
William, and J. Walter Elliott. “A Comparison
of Models of Long-Term
Inflationary Expectations.”
Journal of Monetary Economics 19 (May 1987): 405-25.
Glassman, Cynthia A. “Data Sources Used in Constructing
the U.S. Monetary Aggregates.” Paper presented at 21st
Meeting of Technicians of Central Banks of the American
Continent. Washington: Board of Governors of the Federal
Reserve System, Division of Research and Statistics,
Financial Reports Section, 1984.
Simpson, Thomas D. “The Redefined Monetary Aggregates.”
Federal Reserve Bulletin (February 1980): 97-114.
before the Committee
on
Greenspan,
Alan. “Statement
Banking, Finance and Urban Affairs, U.S. House of Representatives, February 21, 1989.” Federal Reserve Bulletin
75 (April 1989) forthcoming.
Taylor, Herb. “What Has Happened to M1?” Federal Reserve
Bank of Philadelphia Business Review (September/October
1986), pp. 3-14.
Hein, Scott E., and Mack Oct. “Seasonally Adjusting Money:
Procedures, Problems, Proposals.” Federal Reserve Bank
of St. Louis Review 65 (November 1983): 16-24.
Walter, John R. “How to. Interpret the Weekly Federal
Reserve Data.” In The Financial Analyst’s Handbook, 2nd.
ed., edited by Sumner N. Levine. Homewood, Illinois:
Dow Jones-Irwin, 1988.
Stone, Courtenay C., and Jeffrey B. C. Olson. “Are the
Preliminary Week-to-Week
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Hetzel, Robert L., and Yash P. Mehra. “The Behavior of
Money Demand in the 1980s.” Federal Reserve Bank of
Richmond, June 1988. Photocopy.
28
ECONOMIC REVIEW, JANUARY/FEBRUARY 1989